IMPOSSIBLE DREAM: FREE
MARKETS IN MOSCOW
at the Seminar on Futures & Options,
USSR Council of Ministers on Food and Procurement,
November 1, 1990.
most significant part of this address was where it was delivered.
Had anyone suggested a year earlier that I would be standing
in an open forum in the Soviet Union delivering a speech about
market-driven economic order, I would have counseled that they
seek medical assistance.
idea that representatives from the Chicago Mercantile Exchange
and the Chicago Board of Trade—the embodiment of free markets—would
be invited in 1990 as honored guests of the city of Moscow
and the Federation of Russia, was so unbelievable as to be
nothing short of science fiction.
words I used were substantially the same as those I had used
countless of times before to countless audiences—but always
in the free world. For the first time in modern history, or
perhaps even the first time in history, someone was flagrantly
preaching to a very large audience in Moscow—in the shadows
of the Kremlin—that the only Messiah for the Soviet people
months ago, on August 22, 1990, the Chicago Mercantile Exchange
(CME) announced its plans to prepare for an eventual futures
contract on the Russian Ruble. It represents a new and dramatic
chapter in the revolutionary history that began some eighteen
years before. Indeed, the birth of the CME's International Monetary
Market (IMM) on June 16, 1972 is symbolic of the power of an
idea whose time had come—an idea that has caused fundamental
changes in the financial landscape of the world, and one that
is intertwined with events in the Soviet Union and every corner
of the globe. An idea that recognized that the structural changes
in financial markets as a consequence of the telecommunications
revolution would make traditional market concepts obsolete—that
they would disintegrate market barriers resulting from geographical
borders; and that they would demand bold and new financial risk
management tools. Indeed, University of Chicago Professor Merton
Miller, the 1990 Nobel laureate in Economics proclaimed that
financial futures are "the most significant financial innovation
of the last twenty years."
financial futures have become an integral component of the world's
financial markets can be evidenced by the futures exchanges in
London, Paris, Hong Kong, Sydney, Toronto, Singapore, Brazil,
Osaka, Zurich, Frankfurt and Tokyo. Futures markets are symbolic
of the economic order that demonstrated its supremacy over an
economic system whose structure and function was dependent on
central economic controls. Indeed, there are few better examples
of price discovery as a consequence of the free forces of supply
and demand than the markets of futures and options. Their indispensability
to the structure of a market-driven economy was quickly recognized
by none other than President Mikhail Gorbachev as he called for
the immediate creation of securities and commodity exchanges
in the Soviet Union. We applaud this sentiment as well as the
recently announced revolutionary steps of your government in
the difficult journey toward economic reform.
only do futures markets exemplify the infra-structure of a market-driven
economy, but the very same technological advancements that gave
rise to their birth are the same that made Perestroika inevitable.
Indeed, the telecommunications revolution of the last several
decades—or what former Citicorp Chairman Walter Wriston called
the information revolution—made it impossible to continue the
charade and hide the uncompromising truth that an economy dependent
on government edict was doomed to failure. Modern communications
techniques, coupled with massive media penetration in disregard
of national boundaries, offered a stark, unyielding comparison
of economic systems. As journalist Mike O'Neil predicted years
before the 1989 historic events in Eastern Europe: the consequences
of the new telecommunications technology "is hurrying the
collapse of old order, accelerating the velocity of social and
political change, creating informed and politically active publics,
and inciting conflict by publicizing the differences between
people and nations."
it has throughout the history of mankind, technology again dictated
fundamental change in the world's social structure and reshaped
both the political and economic landscape of our planet. Its
immediate impact on the populations of Russian and Eastern Europe
is now an historical reality. And Messrs. Gorbachev and Yeltsin
both understand the same fact as Federal Reserve Board Chairman
Alan Greenspan, namely that: The acceptance and growth of financial
futures is the consequence of a need in our volatile world for
a cost-efficient market mechanism with which to discover price
and hedge financial risk.
if anyone in the Soviet Union believes that financial futures
can instantly reform your current economic status into a vibrant,
successful market-driven economy—or if anyone in the Soviet Union
or re-emerging nations of Eastern Europe believe that once securities
or futures exchanges are created within your respective borders
they will instantly transform stagnant economic conditions into
prosperous standards of living for all—allow me to quickly persuade
you that this is not the case. Indeed, nothing can be further
from the truth. Nothing can serve to impede your journey to economic
success more than the mistaken belief that there is an instant
solution—for one does not exist. The road to economic success
is painful, long, extremely difficult, and laden with pitfalls
that can delay the process, divert you in a wrong direction,
or lead you toward a dead end. To be perfectly blunt, conditions
here will get much worse before they get better—but there is
no other choice.
they have their differences, Messrs. Gorbachev and Yeltsin both
recognize the efficiency of a market economy; that the prerequisite
to the effective functioning of the market includes the right
of private property, the shift from government to private ownership
of assets, the restructuring of the banking system to create
a central bank independent of the government, the need for commercial
banks to be independent of the central bank, and to create a
single convertible national currency. These are the fundamentals
upon which the road to a free market economy can successfully
be built. And while none of these can be accomplished overnight,
there will be stages. For instance, the recent announcement that
four exchange rates will soon be established for the Ruble are
encouraging—if they will in fact take place:
A commercial rate of 1.8 Ruble to the Dollar, for all trade and
investment transactions. This will replace the complex and antiquated
system of about 2000 different so-called co-efficient. The new
system will undoubtedly encourage exports as it is intended.
The official rate of .56 Ruble to the Dollar for international
statistical comparisons and for calculating payment by developing
countries on Ruble-denominated debt.
The market rate to be set by new exchanges which will become
operational in Moscow and other cities and be open twice a week
for foreigners to use for their profit conversion to hard currency.
This step in particular is of critical relevance in establishing
a fully convertible Ruble.
A tourist rate of 6.2 Rubles to the Dollar for Russian citizens
who intend to travel abroad by virtue of the newly-liberalized
you achieve it, through slow stages or through a more painful
rapid mechanism, ultimately there must be a single, fully convertible
rate for the Ruble—one that can meet the fair market test on
the international arena—for only then can the Ruble be convertible.
plan recognizes the critical Soviet need for foreign investment
capital. To rely solely on foreign government loans to bolster
your economy would be a serious mistake—indeed because the United
States today finds its own economic house in disorder, our flow
of government funds to the Soviet Union will be limited. Consequently,
it is imperative that foreign private sector capital be sought.
To accomplish this result, it is mandatory that current restrictions
on exporting profits be dropped and that foreign investors know
how to calculate their rate of return. Therefore, the announced
Ruble plans are essential elements in the journey to a market
economy, and while such moves are fraught with the danger of
enormous inflation and pain for the average citizen, they are
steps that cannot be avoided. In this respect, the Chicago Mercantile
Exchange will carefully monitor the results as we attempt to
determine at which point we can assist the process by instituting
a viable futures market in the Ruble.
am heartened by conversations with Sergei Stankevitch, Gennady
Poleshuk and Vladimir Paplauski and have a great deal of faith
in their intellect. I respect their basic understanding of futures
markets. The statements of your Mayor, the Honorable Gavriil
Popov, are refreshing and encouraging for he is not only an advocate
of a market economy, but is providing the infrastructure to encourage
its implementation. The Moscow Commodity Exchange is but one
significant example of his efforts. And while the Moscow Commodity
Exchange may not, at its inception, look or trade in the same
manner as do the Chicago markets—indeed its wares of physical
commodities are very different from our financial indexes and
intangibles— nevertheless, this exchange represents the all important
beginning. I salute you for this first milestone.
the world is cognizant of the 500 Day Plan approved on September
11 by the Parliament of the Russian Republic, we are also aware
of the philosophical differences that exist regarding the rapidity
by which the intended reforms can occur—issues such as decollectivizing
farming and the restructuring of farm land from state to private
ownership, and issues such as tax collection and central authority.
These issues represent difficult internal Soviet political and
economic questions. My opinion—as an external observer—is that
the sooner you begin the reform process the better because no
matter how swiftly you intend the necessary reforms to be implemented,
they will take longer. There is little doubt you will encounter
major economic disruptions as well as serious unexpected difficulties.
These may produce serious civil pressures and cause segments
of the Soviet public to call for a return of the old order. But,
such reactions would be foolhardy—the old order was without hope
and brought about today's conditions. More than one-third of
your population earns less than 100 Rubles per month and the
average monthly wage is only 250 Rubles—the price of ten packs
of American cigarettes on the Black Market.
the old order is no answer. Your only hope is that from the strife
of the coming years will emerge a new Soviet world based on the
precepts of individual freedom and a market-driven economy. And
although your task will be arduous and will take many years,
you have the resources to be successful. Your first and foremost
resource is the people of Russia. For a nation that gave birth
to Tolstoy, Dostoyevsky, Pushkin, Gorky, Borodin and Tchaikovsky
is a nation of an immensely rich and resourceful culture, one
that has the depth of talent to lead toward economic victory.
Indeed, the Soviet Union has endured much misery in its history,
but it has persevered. And it can persevere this challenge as
of Russia's most admirable characteristics will need to be redirected
in the process of moving toward a market economy. Your spiritual
soul will need to develop a somewhat materialistic counterpart.
As author Hedrick Smith recently wrote: "Perestroika has
to happen in the mind for it to work. People's outlooks have
to change and that happens as society changes. It is a push-pull,
gradual process. It cannot be decreed."
this juncture, however, it is critical for your leaders to concede
their differences, compromise divergent points of view, build
upon their basic agreements, and assist your nation in achieving
common objectives. Indeed, the greatest disservice to the Soviet
Union at this time is for divisiveness among the leadership to
detract you from the goal you seek. Therefore, urge your leadership
to embrace common goals and join hands to lead your nation on
the road to a market economy.
the way, you will need to build futures and options markets,
for these markets are without substitute in providing a mechanism
for price discovery. They are an open forum where market participants—buyers
or sellers, producers or consumers, investors or speculators—have
the ability to direct their price opinion on the value of the
product to the auction process. Through this process, a fair
price for the product is discovered. And for that moment in time,
until the next set of variables change the price, value is established.
No other mechanism can boast a more certain avenue at determining
value than the futures and options markets.
discovery is but one function of futures and options markets.
These markets are ideally suited for the transference of risk
(hedging) as well as for capitalizing on profit opportunities.
In the world of today—where innovation and competition will intensify,
where demand for tailored risk management strategies will increase,
and where opportunities will rapidly appear and disappear on
a constantly changing financial horizon—few forums serve the
needs of the financial community better than futures and options
markets. Indeed, no markets other than futures and options offer
a blend of so many credible instruments to safeguard or strengthen
established futures and options markets offer the widest array
of agricultural and financial instruments—in virtually every
center of finance—from beans to bonds, from cattle to crude,
from stocks to silver, from gilt to gold, from euros to yen,
from coffee to the CPI. These markets offer a measure of liquidity
not available elsewhere; a cost-efficiency of incomparable narrow
bid/ask spreads; an ability to swiftly institute a variety of
strategies, programs, or fine-tuning techniques; the ability
to cost-effectively adjust portfolio exposure; a flexibility
to choose between the most fairly-priced alternative instrument
at any time; a facility to preserve credit lines within a system
offering the highest degree of credit-worthiness; a fluency to
access all markets on a global basis; a speed and certainty of
execution difficult to duplicate; and soon, market coverage on
a 24-hour basis. These aspects of futures and options—their price
discovery apparatus, their hedging ability, and their profit
potential—have made these instruments integral to the infra-structure
of global finance and indispensable to a market-driven economy.
GLOBEX—the newest addition to the revolution sponsored in Chicago
in 1972—will again revolutionize the markets of the world. GLOBEX
is an electronic trading system currently being developed between
the Chicago Mercantile Exchange, the Chicago Board of Trade,
and Reuters Holdings PLC— the world's largest international market
telecommunications entity. When GLOBEX becomes functional, it
will allow all our American futures and options products to be
traded worldwide on a 24-hour basis. It will also allow all the
major futures markets to participate with their unique product
line. Indeed, the MATIF, the Paris-based futures exchange which
is today number one in Europe, is already a partner to this system.
Ultimately, GLOBEX will be the central trading system for all
the world's futures and options markets. And, in the future when
the Soviet Union is well along in its free market journey, the
Moscow Commodity Exchange may also become a proud member of the
GLOBEX family of world futures exchanges.
that day, allow me to congratulate you on the momentous step
you have taken in opening the doors to the Moscow Commodity Exchange.
On behalf of all the members of the Chicago Mercantile Exchange,
best wishes. We stand ready to assist you in every way possible.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
to top of page | Return to
Index | Home Page